Middle class getting caught in income tax trap

Published: Wednesday, June 28, 2000

WASHINGTON {AP} Simply because they live in a high-tax state or claim numerous deductions, thousands of middle-class Americans are paying a special tax originally designed to prevent investors and the wealthy from sheltering too much income.

The IRS says 828,000 taxpayers were caught in the tax trap in 1998 a 25 percent increase over the year before.

The numbers are expected to go nowhere but up, mainly because the alternative minimum tax was never indexed for inflation. As incomes continue to rise and Congress gives people more deductions and credits, more and more taxpayers will be forced to pay this tax.

"It's catching people it was never intended to catch," said Hank Gutman, a partner in the Washington office of the KPMG accounting firm. "It's making people go through a lot of complexity and they don't even understand why."

The alternative minimum tax is essentially a parallel income tax system created in 1969 to ensure that the wealthy and corporations could not entirely escape taxes through legal means. Income is taxed at up to 28 percent, and numerous deductions and credits including those for state income taxes and unreimbursed employee business expenses are either not allowed or have greatly reduced benefits.

Internal Revenue Service figures released Tuesday show that about 480,000 taxpayers paid $2.8 billion in minimum taxes in 1996. A year later, the number of taxpayers affected jumped to 618,000 who paid just over $4 billion a 42 percent increase followed by another increase to $4.4 billion in 1998.

There is also further evidence that the minimum tax is reaching more middle-income families. For example, in 1996 about 59,000 taxpayers with adjusted gross income between $75,000 and $100,000 were subject to the tax. A year later, that number had grown to almost 86,700 taxpayers.

"This shows once and for all that when taxes are meant to soak the rich, it's usually the middle class that gets wet," said Rep. Bill Archer, R-Texas, chairman of the House Ways and Means Committee.

Such taxpayers pay the bottom 15 percent income tax on a great portion of their earnings and can take a broad range of deductions under the ordinary tax system. Under the alternative system, they must pay a flat tax of either 26 percent or 28 percent and cannot enjoy many of those same deductions.

"It really does seem to take more than its share of a bite," said Maggie Doedtman, a senior tax research specialist at tax preparer H&R Block.